Community is the New Commodity – Lacroy Nixon

How to Start a Foundation for Your Nonprofit Organization

Nonprofits operate in a continuous cycle involving donor acquisition, fundraising efforts, and mission-driven work. As a nonprofit leader, you may be looking for new ways to give to your community and break out of your organization’s cyclical operations.

By forming a private foundation, you can continue your nonprofit’s work while supporting other organizations that address a cause you care about. In this guide, we’ll cover the five necessary steps to start a foundation:

1. Understand nonprofit foundation basics
2. Determine the legal structure
3. Fill your foundation’s board
4. Establish a fundraising plan
5. Budget your foundation’s money separately

With the right funding and approach, you can create a foundation that takes your community service a step further. We’ll give you all the tools you need to start a foundation, and, more importantly, maintain it.

1. Understand nonprofit foundation basics

Before you get started, you should be able to answer one question: What is a nonprofit foundation? 

Organizations that qualify as 501(c)(3) tax-exempt are automatically defined as private foundations by the IRS unless they satisfy certain exceptions, such as being organized as a church, hospital, school, or other specifically named entity type. These private, nongovernmental organizations are usually organized by a single source—like a family or corporation—which then distributes grants to help fund other nonprofits, most often public charities.

There are three key differences between a public charity and a private foundation:

1. Funding: A foundation is generally sustained through private monetary donations, securities, and other funds, not donations from the public, though that is allowed.
2. Activities: While public charities provide some kind of charitable good or service to the people they assist, a private foundation exists primarily to grant funds. Although their grants usually support charitable activities, foundations don’t usually participate directly in the programs or services.
3. Taxes: Private foundations are exempt from income tax, just like other nonprofits. However, they are subject to a 1-2% excise tax on income generated by investments.

With the unique role of a foundation also comes different legal requirements. For example, foundations must give 5% of their net assets in grants each year for charitable purposes. These are most often grants to public charities, but other charitable recipients can be included. Understanding how foundations work will give you the necessary context to begin planning the structure and operations of your foundation.

2. Determine the legal structure

The logistics of organizing and operating a private foundation require legal supervision. To avoid legal obstacles when starting a foundation, you’ll need to:

• Double-check your proposed name. Do a quick search to make sure that the name you’ve picked out for your foundation is not registered with another corporation.
• Fill out the Articles of Incorporation. These are essentially the legal documents that make your foundation legitimate—like a business plan, but for nonprofits. You can find plenty of templates online if you’re doing this without an attorney.
• Create bylaws for your foundation. These rules will outline how you plan to select your board, avoid conflicts of interest, manage your funds, etc. Some states don’t require bylaws, but it’s always smart to have them anyway for contractual and organizational purposes.

There are numerous legal steps to follow, and you’ll need to contact your Secretary of State’s business office to make sure you don’t leave anything out. If you’re confident in your ability to navigate these legal requirements and want to save money, you can do this all yourself. However, hiring an attorney can help you avoid the risk of noncompliance penalties. 

You should be prepared to pay a few legal fees during this process and can plan for the investment in an attorney in your legal fee budget. Decide whether or not you want to hire an attorney, then complete the necessary paperwork and submit it to the IRS. 

3. Fill your foundation’s board

After receiving tax-exempt status from the IRS, start planning the structure and operations of your foundation. Much like you’d hire employees upon starting a business, you’ll need board members to manage and operate your foundation. Board members will be responsible for many tasks, including:

• Accountability: Board members will ensure the foundation’s operations advance its mission.
• Advocacy: Board members will be ambassadors for the foundation, representing your organization and its work in their social circles.
• Governance: Board members will steward assets in the best interest of the foundation and address any conflicts of interest as they arise.
• Networking: Board members will make connections with other community leaders.

As you select board members, keep these tasks in mind and consider who would fill these roles most effectively. As the leader of your foundation, you should also be a board member (or heavily involved with this team.) 

Your board should include a variety of close-knit and resourceful members. The team members with whom you have personal connections will help cultivate a strong sense of community, while outsiders can provide the connections that bring in bigger donations and networking opportunities. 

To achieve this balance, some foundations turn to close friends, family members, experts within the field, and independently wealthy people who are passionate about their cause. Determine your foundation’s specific needs and choose your board accordingly.

4. Establish a fundraising plan

Although foundations typically have a steady funding source or a principal investment, such as an endowment, you may also need to fundraise to keep your foundation afloat. As a nonprofit leader, you likely have a solid background in fundraising strategies. You can leverage these tried-and-true techniques, such as:

• Crowdfunding campaigns
• Events, like galas or auctions
• Handwritten donation appeals

However, raising money for your private foundation isn’t as simple as just choosing a fundraising idea. To publicly solicit donations for your foundation, you may need to register for charitable solicitations in your state. Also, contributions to a private foundation will have different requirements than those to your nonprofit. Fundraising is another area of foundation management in which an attorney or budgeting expert will be helpful.

5. Budget your foundation’s money separately

However you choose to fundraise, make sure you’re always budgeting and planning for the months ahead. You’ll have different fundraising goals, expenses, and tax requirements with your foundation, so it’s important that you keep it entirely separate from your nonprofit’s budget. For example, your foundation will need to:

• Create two types of grants—general support and specific project grants.
• Keep a record of all grants given throughout the year.
• File annual tax returns, such as Form 990-PF.

Your private foundation and nonprofit are separate entities with different goals and requirements. To ensure both organizations maintain compliance with their different legal structures, you’ll need to keep their budgets completely independent from each other. Ask an attorney for help if you’re concerned they might be overlapping.

Once you know how to create and sustain a foundation for your nonprofit, you’ll be able to expand the impact of your work and give back to your community more than ever before. 

Keep up with the requirements of private foundation operation, but don’t be afraid to enlist the help of an expert if you’re able to! Compliance is their job, and social good is yours. Focus on your mission and leverage the power of private foundations to accomplish your goals.

The vision statement vs mission statement for nonprofits topic depicts two key components of a nonprofit’s purpose and direction. These are two essential components of a nonprofit’s organizational identity. A vision statement is an aspirational declaration of what an organization hopes to achieve. It provides direction and purpose for the organization and is a rallying cry for all stakeholders to work towards a common goal. On the other hand, a mission statement defines the organization’s purpose, what it aims to accomplish, and how it plans to achieve its goals. It acts as a roadmap and provides the organization’s operations and activities framework. 

A clear and well-articulated vision and mission statement can help an organization maintain its focus and stay aligned with its goals and objectives, even during times of change and pressure. The vision and mission statement should be lived out, not just documented or displayed as wall decor. The more the organization’s work aligns with its vision and mission, the more authentic and impactful it will be.

It’s important to note that while a vision statement is a destination, a mission statement is the map, and the organization’s values are the guideposts. It’s a trifecta of corporate culture that helps an organization stay focused on its purpose and achieve its goals.

Let’s dive deeper into understanding the vision statement.

Your vision should exist outside a frame on the wall or a page in the handbook.

As I write this, I think back to the 1990s and the prevalence of Successories. Motivational artwork…usually of a nature scene and one aspirational term. The decor of the day, these pieces adorned office walls everywhere. Although they were hung with good intentions, in my experience, most became the inspiration for snarky office jokes. Perhaps it was the fact that businesses were purchasing prefab values that led to the backlash. Team members want to see values lived out, not published or printed for wall decor.

Don’t get me wrong, documenting your mission and vision statements is important, but in an ideal world, it’s something written on people’s hearts, as well as in their orientation handbook.

A decade or so ago, I worked for a very large publishing house. New team member orientation was done in batches of 3-10 people at a time. During one of my first onboarding sessions, the HR director asked our group of six who could recite the organization’s mission statement. I immediately scanned the room, looking for expressions of confidence or smirks from my new peers…nothing. In fact, they all looked panicked. Recalling the narrative of the statement was easy, but I wasn’t 100% sure about each word or the order. Something is better than nothing, right? I timidly raised my hand and recited a paraphrased version of the statement. I hit the major parts but undoubtedly did not get it verbatim. The HR director praised my effort and explained, “You’re not 100% correct in the wording, but you nailed the sentiment.”

Stating your vision is not about the words, but it is about understanding.

It’s hard to see the horizon when you’re in the trenches.

Nonprofit work culture is the tyranny of the urgent. If your days are like mine, no sooner do you take your third cup of coffee and it’s lunchtime. It’s a blur of decisions, opportunities, struggles, and task work that has to get done. Beneath the busyness, lack of capacity, budgets, and good intentions are a thousand small decisions that cumulatively steer the trajectory of your work.

Sure, we do the strategic planning routine, but let’s be honest…where does that plan exist? A file cabinet, a pad of window-sized post-its, or a shared drive…right? A year cannot be steered by one day of planning. A vision cannot be maintained when it isn’t acted on daily.

Create a vision that captures today and tomorrow.

Great vision statements build off the work we’re doing today by casting a vision of that work maximized in the future. For example, look at these examples of great vision statements:

Make-A-Wish: That people everywhere will share the power of a wish.

World Vision: We look forward to a world where every child experiences Jesus’ promise of life in all its fullness.

Now, I’m certain the world is not fully embracing sustainable energy, but we’re getting there.

I’m also certain there are still millions of children struggling in this world, but World Vision is helping.

A vision statement is not an endpoint or a status. It is an ideal for today, and for many days that will have a great cumulative impact. Like Make-A-Wish and World Vision, great organizations prepare statements that allow for inclusivity in the solution and speak to action. Whether you’re actively working for your program’s purpose or doing the behind-the-scenes work to make it possible, it should align and further your vision.

The danger zone for most nonprofits is fundraising. There are all sorts of ways to raise support and make money that can take an organization outside its vision and purpose. A strong vision influences every area of work—from development to direct services. The more of a correlation you can create between your appeals and your purpose, the more authentic your vision will become.

Ways to keep your vision visible:

Recite it. Remember starting every school day with the Pledge of Allegiance? Do the same with your vision statement before your board and operational meetings.

Develop a decision-making test for your organization that includes reference to your vision and mission. If it doesn’t pass the test, it doesn’t happen.

Call out excellence. Reward employees and volunteers when they do things that embody the vision and mission of your organization.

Mission, vision, values…what does it all mean?

A vision statement is your destination, a mission statement is your map, and your values are your guideposts.

Before we get into the trifecta of corporate culture listed above, remember: don’t get caught up in semantics. Whether it’s your mission statement, vision, values, or a mantra, the goal is to have an easily understood defining purpose. Trying to fit your organization’s culture into one of these buckets is work you don’t have time for. That said, here’s an explanation of the role each could play:

Vision Statement: A guiding purpose. The ideal that your mission and values build toward.

Mission Statement: The actions your organization will take to achieve its vision. (Note: this doesn’t need to be ALL the actions…keep it short and easily memorized.)

Core Values: The fundamental beliefs that guide decisions and actions in your organization.

Less may be more, as it’s a lot to ask of any team to memorize this many things. Most importantly, your leadership should reflect the ideal you’re asking your organization to achieve.

Final thought: These times, they are a-changin’

World Vision’s vision makes no mention of poverty or water. Make-A-Wish’s vision doesn’t include any reference to the ailments of children. Their visions are broad enough to allow for the possibility of achievement and satisfaction of their missional work. In a world where ideas move from conception to commodity in a decade, be careful to not think too small. Think in terms of an overarching purpose that recognizes that there are always ways to do more good.

Take your good idea to a fully-functioning 501c3

The Start a Nonprofit Class is an on-demand, self-paced course taught by nonprofit expert, Randy Hawthorne. This class walks you through the beginning steps of taking a cause concept to an operational nonprofit mission.

Why Are Mission Statements Important

Many of us may need a clearer idea of our mission statement and how to make that statement memorable to others. Unfortunately, this means that the current mission statement of our nonprofit organization is ineffective. However, by learning from examples of good and bad nonprofit mission statements, we can ensure that our mission statement effectively communicates the purpose or goals of our organization. Before diving into examples, it is important to understand the significance of having a well-crafted mission statement.

The Attributes of Good and Bad Mission Statements

Your mission statement serves as a clear and concise representation of your nonprofit organization to those outside it.

Mission statements are essential tools for promoting and positioning your nonprofit organization in the minds of others. It is a way to make your organization stand out by highlighting the unique purpose that resonates with your supporters. It is also a way to communicate your organization’s message to the world.

3 Fundamental Elements of Mission Statements

1. The Cause  (What is the issue? Who is affected? Where is the location or specific community?)

2. The Action (What are you doing to improve the cause?)

3. The Result (What impact does the action have on the cause?)

These fundamental elements characterize the most effective mission statements. Simplicity and clarity are crucial. Complexity does not necessarily add value to a mission statement. Brief, compelling introductions to the organization will spark enough interest to encourage further engagement. Mission statements should not provide a comprehensive overview of the organization but should give a glimpse of the organization at its core.

Examples of Nonprofit Mission Statements

The good, the bad, and the ugly.

Let’s look at mission statements from well-known organizations.

charity:water:

“We’re a nonprofit organization bringing clean and safe drinking water to people around the world.”

Review: This is a great mission statement because it is simple, emotional, and contains all three elements previously mentioned.

1. Fluff: We’re a nonprofit organization
2. Action: bringing
3. Result: clean and safe drinking water
4. Who/Cause: people around the world

The statement presents a problem, outlines an action to change the problem, then addresses the population served.

Springboard for the Arts:

“Springboard for the Arts is an economic and community development organization for artists and by artists. Our work is about building stronger communities, neighborhoods, and economies, and we believe that artists are an important leverage point in that work. Springboard for the Arts’ mission is to cultivate vibrant communities by connecting artists with the skills, information, and services they need to make a living and a life.”

Review: This is a worthy cause – utilizing art to create thriving communities – that we fully support. However, the mission could be more impactful if it were more succinct. By condensing a few sentences and crafting a powerful, motivating mission statement, it could also be easily shared on social media platforms like Twitter.

Update: Luckily, mission statements can be updated. Since this article was published, Springboard for the Arts has upgraded their statement to “Springboard for the Arts’ mission is to support artists with the tools to make a living and a life, and to build just and equitable communities full of meaning, joy, and connection.”

Nike

“Just do it.”

Review: Nike just did it. You’re inspired to go buy some sneakers and use that gym membership now, aren’t you? Same here.

The Women’s Center

“The mission of The Women’s Center is to significantly improve the mental health and well-being of all members of the community through counseling, education, support and advocacy.”

Review:  The public and potential donors understand the nonprofit’s awesome work because they can read directly how their support (especially financial) is put to use. All it takes is keeping it simple!

5 Quick Tests For Your Mission Statement

1. Check its Pronounceability: Try reading your mission statement out loud. Does it flow smoothly, or is it difficult to say?
2. Test its Memorability: Ask a friend or colleague to read your mission statement aloud and then engage in a different conversation for a minute. Afterward, ask them to repeat the statement. If they struggle to recall it, it may need further revision.
3. Seek feedback from outsiders: Gather feedback from individuals unfamiliar with your cause and ask them to evaluate your mission statement.
4. Measure the end goal: Consider when your nonprofit will be able to declare “mission accomplished.” If there is no clear endpoint, it may be too vague.
5. Gauge the ambiguity: Ensure your mission statement is unique to your organization and not too similar to other organizations.

A Mission Statement is Only Words

It’s critical to remember that more than a mission statement is required. While it’s easy to establish ambitious goals for your organization and devise a strategy, it’s equally important to take action and bring those goals to fruition. Your organization has a purpose. Now it’s time to make it a reality.

How to Write a Mission Statement

If you need more help, use our guide to writing a mission statement in one hour.

PS: Use the 5 Quick Tests above, and look at the opening chart. Do you pass? Do you need to revise your statement? Let’s all work together to craft awesome statements. Now you can work on your vision and values.

No matter how invested you are in your core mission and all that it takes to make it happen, starting and growing your nonprofit can be hard. There are so many hoops to jump through, from certifying your nonprofit status designation, developing a sustainable and effective nonprofit strategy, and more. That is a lot for one or a small group of people to handle. The team at BryteBridge specializing in helping new nonprofits have a strong start.

How much does it cost to start a nonprofit?

We all know that money doesn’t grow on trees. Starting a nonprofit would be as easy as planting a money tree if it did. In a world where money doesn’t come quite so easily, starting a nonprofit with no cash can be a challenge. Luckily the task isn’t impossible. 

But it’s good that social activists start nonprofits with a passion, purpose, and—hopefully—enough bankroll to finance their budding organization. We know that starting a nonprofit is hard work, and we must be mindful of the costs involved. Few can cut it, though we’re confident you can. 

These steps will help you determine the needs of your nonprofit, the solutions to achieve your mission, a list of the fees, and the finance-related tasks associated with starting a nonprofit.

Start with Your Mission And Vision Statement 

Begin with an inspiring task, like writing your nonprofit mission statement or examining your vision for the cause. Knowing why you’re going through the difficult planning and budgeting process may propel you through dreary days. But after crafting your mission statement, it’s time to settle into the complex but critical financial planning process. Plan for the funds you need to start and sustain your nonprofit, and you will save trouble in the long run (it might even save your nonprofit). 

Trust your mission

Gaining trust and supporters is often put on the back burner until organizations can raise the initial funds to start their nonprofit. Don’t make this mistake, or you will end up elongating the process of becoming an official nonprofit.

Trust that your mission can help you earn money by connecting personally with possible contributors. If they know and understand your goal, they will be more likely to help you achieve it. With more volunteers and donors by your side, becoming a nonprofit will seem less of a burden and more like you already have nonprofit status.

Plan Like a Business 

Nonprofit executives will rightly tell you that a nonprofit is another form of business. Like a business, you need more revenue than expenses. Create a business plan for your nonprofit. Then, you know where the money is coming from and where it’s going.

As you budget through your business plan, take a good look at your nonprofit’s revenue streams. Where did your current funds come from, and can you count on them to continue after the nonprofit startup process? The health and longevity of these revenue streams (individuals, the government, grants) must be on your radar for a stronger nonprofit. 

Don’t be fooled into thinking there will be a magic startup grant available for your cause. Most foundations require nonprofits to exist for at least one year before considering them for funding. Consider alternative initial funding methods like earned income through product sales or services, a fiscal sponsorship with a like-minded nonprofit, or even a low-interest loan.

Take another cue from the business world and consider hiring experts to help you navigate the filing and formation process. Companies like BryteBridge specialize in helping nonprofits and ensuring you take all pivotal steps. There is nothing worse than rejection and having to start over. Working with experts often saves you time and money in the long run.

Nonprofit Registration and Filing Expenses

Knowing what you’re up against is always good before diving into a challenge. Before you file for 501(c)3 status and tax exemption, you’ll need to pay a fee that is dependent on your budget size. Since your nonprofit is starting up, the fee shouldn’t be outrageous. If your operating budget is $10,000 or less, the fee will be around $400 – $850. BryteBridge has an easy-to-use guide for researching what is required where you’re launching your nonprofit. 

Your organization will have approximately 15 months to file Form 1023, which is a form that assesses your nonprofit’s structure and programs. The form is necessary for 501(c)3 status. Additionally, to gain 501(c)3 status, you must be incorporated, and most states charge a fee when you file for incorporation. You must look at your state filing requirements and expenses. Once you have filled out the necessary paperwork, knowing what you’ll need to file at tax time each year is important. 

You should review this list of IRS forms for exempt nonprofits. Remember many filing expenses, such as charitable solicitation licenses and tax filings, are annual and should become part of your operating budget. 

If this sounds overwhelming, consider bringing in an expert to help you navigate the legalities and ensure you don’t miss any critical steps. Use a consulting firm that specializes in nonprofit startups to ensure you get comprehensive help. It’s easier and more affordable than hiring a CPA, attorney, and document prep agent separately. However, if you’re not comfortable preparing your filings, you may need outside help. Hiring a CPA or attorney will add some professional fees to your startup costs but might save you time and trouble in the long run. 

Nonprofit Presence Expenses

As many nonprofit startups have learned the hard way, you can exist without being found. Don’t overlook the importance of launching with a strong website, branded email, and a logo. Using free or low-cost platforms like Squarespace and Gmail will help you get your cause created without draining your startup funds. In addition, tools like Paypal and Bitpay allow your startup to accept donations from credit cards and cryptocurrencies through exchange markets. Make sure you are online and in person – if that is how you deliver your program. If your nonprofit requires a physical space to carry out its mission, consider asking a partner organization to borrow some space temporarily or work remotely. Small business and nonprofit incubators are a great way to build your network and your cause while saving on the rent of a private space.

Initial Marketing Expenses

You want your nonprofit startup to look like it’s going to succeed. Show up strong with a logo and brand guidelines to help build your organization’s reputation and recognition. You’ll need to work hard to get the word out initially. Invest in well-crafted emails, newsletters, and direct mail pieces. These “front door” pieces have a great return on investment. Consider using a freelance service like Fiverr or a volunteer service like Catchafire to help get the work done while keeping these costs low.

Service and Program Expenses

Delivering on your mission may be the hardest cost to estimate when you start your nonprofit. You might want to go from zero to 60mph when delivering on your purpose, but you’ll likely benefit from launching in stages. Map out your program’s impact. Examine if you can deliver on it incrementally. This slow and steady approach may save your sanity and help you determine your actual program costs more accurately.

Talk to your peers who deliver the same or similar program to learn from their experience. If you go outside your community or direct impact area the lines of communication will likely open up. Remember, these peers were once trying to determine the cost to start a nonprofit, too!

The financial considerations involved in starting a nonprofit require a lot of legwork and more than a little paperwork, but you will be rewarded with financial security.

Use the Buddy System

Everything is better with a friend by your side – or in this case, another nonprofit. Grant money seems like an easy and obvious option for a new nonprofit. But grant money is not as easily attainable as you think, especially if you have yet to build a reputation. 

Look for a similar organization that can help you find grants. They will have a list of organizations that gave them grant money that would likely be willing to give to your nonprofit since your missions are similar. The government can also be a great source for nonprofits that need financial assistance. Websites like grants.gov and usa.gov offer places to search for nonprofit grants and funding. With these websites, you can specify which state you’ll be starting your nonprofit in. You can find specific funding for your organization at the state and local levels.

Finding another organization with a similar mission can be helpful in a variety of other ways besides finding grants. They can provide tips and insights into everything you will be doing. They’ve been through everything already and should be able to guide you. The common interest in your goals will be an instant connection among organizations, meaning you’ll be on the same page.

Create a Board

Begin building a board for your organization. The IRS usually requires a minimum of three board members for every nonprofit. Your board should have members who will engage in your mission. They should be willing to support the nonprofit as it grows. Your board can also act as a fundraising team. The board members themselves can give to the organization. Or, they can help secure donors and help with fundraising efforts. You should be able to rely upon your board members to assist in generating revenue as you start your nonprofit. Check out this other resource if you are seeking ways to build a board of fundraisers. 

Types of Revenue When Starting A Nonprofit 

As we mentioned above, when starting a nonprofit, you probably won’t be applying for grants immediately. Consider these additional revenue streams for your nonprofit.

• Donations: This is the most common type of income for nonprofits, and it comes from individual donors, foundations, corporations, and government grants. Begin thinking about fundraising campaigns or ways to seek donations.

• Membership fees: Some nonprofits rely on membership fees as a primary source of income. Individuals or organizations pay fees to become members of the nonprofit. Consider if this applies to your organization.

• Fundraising events: Nonprofits often hold events, such as charity auctions, galas, golf tournaments, walks, and more, to raise money. If you’re just starting out, you may not be able to plan a large fundraising event. However, these may be an option if you have a solid volunteer base or board to help you succeed. 

• Program service revenue: Nonprofits that offer services or products, such as education or counseling programs, may generate income through program service revenue. Nonprofits can also create revenue by providing consultancy services to businesses, such as training, research, or evaluation services.

• Investment income: Nonprofits can earn income from stocks, bonds, and real estate investments.

• Rental income: Nonprofits with property, such as a building or land, can earn income by renting it out. 

• Social enterprise: Nonprofits can generate income by running a social enterprise. Examples include cafés or retail stores. They provide goods or services to the community. Some nonprofits may even have thrift stores to help build revenue. 

• Sponsorships and advertising: Nonprofits can generate income by partnering with businesses or individuals to provide sponsorships or advertising opportunities. If you are seeking corporate sponsorships, check out this on-demand webinar on how to secure them.

• Crowdfunding: Nonprofits can use online platforms to raise money from many people, each contributing a small amount.

• Merchandising or product sales: Nonprofits can sell merchandise such as t-shirts, mugs, or other items with their logo to raise funds. You could also sell items like books or artwork.

• Online platforms: Nonprofits can use online platforms such as Patreon, Kickstarter or GoFundMe to raise funds, sell merchandise or offer services.

To wrap it up

Don’t focus so much on finding money and then starting your nonprofit. Instead, build your nonprofit as you try to gain 501(c)3 status. If you’re passionate about your cause and people know it, they will, in turn, be excited to help you.

Here are a few more resources to help you determine your cost to start a nonprofit:

Nonprofit Startup Guide

Start a Nonprofit Class

New to Nonprofit Peer Group

Ultimate Budget Guide

Cause Camp

This blog was sponsored by BryteBridge Nonprofit Solutions

Starting a nonprofit organization is a rewarding experience. Nonprofits meet the needs of underserved populations and ensure no one goes without essential services. But starting a business of any kind, especially a nonprofit, requires planning and preparation. Here are nine things every nonprofit startup needs to know.

1. You Can’t Do This Alone

Every nonprofit organization requires at least three unrelated board members. While you might want to do all of the work for your organization, it’s essential to find a team of people who share your vision. Make sure everyone also shares the workload, too.

2. Nonprofits Are Legal Corporations

Every nonprofit organization is a legal corporation, registered with the state and federal governments. Incorporation sets the organization up for legal operation in the state. It prepares the nonprofit to file for federal tax-exempt status. The process for forming a legal corporation varies by state. Generally, it requires Articles of Incorporation and a federal Employer Identification Number (EIN). Once established, nonprofit corporations can open a bank account, rent an office, and begin operations. In most cases, however, you cannot yet ask for public donations.

3. Tax-Exempt Status Takes A Long Time

Tax-exempt status is the most critical step in the formation of a nonprofit. Once recognized as tax-exempt by the IRS, the organization no longer pays federal and (in many cases) state corporate income taxes. The average person spends between eight and ten hours filling out the IRS tax-exempt application. Once submitted, the IRS can take many months before issuing a determination. While waiting for status, you are free to operate. However, there may be restrictions on soliciting donations.

4. Every State Has Different Rules

In most states, applying for federal tax-exempt status is not enough to start asking for donations. Nonprofit organizations must file additional state documents with various agencies to complete the registration. Knowing which documents your state requires is the difference between operating smoothly and facing hefty penalties and late fees. It’s essential to clarify and understand the requirements for charity registration and state tax exemptions in your state.

5. Marketing Is Not A Dirty Word

Most people starting a nonprofit do so because they’re passionate about their organization’s purpose. This drive is crucial for the organization’s success. However, no matter how devoted the Board of Directors is, without marketing, potential donors and those needing your organization’s services will not know the opportunity exists. Unfortunately, many nonprofit organizations don’t focus enough time or energy on marketing. They often think they can’t afford the cost or that by starting a nonprofit, volunteers and donations will automatically arrive. Without proper marketing, not only will potential volunteers and donors not know your nonprofit exists, but they won’t want to engage.

6. Most New Nonprofits Cannot Apply For Grant Money

With few exceptions, most foundations will not consider a grant application without an established history of diversified and successful fundraising. To build toward applying for grants, a nonprofit startup needs a fundraising plan largely built upon personal donations. As the organization develops results, local businesses may be willing to provide in-kind or financial sponsorships. These funds can help make an immediate difference and will establish a case for eventual grant applications.

7. Volunteers Always Come Before Paid Staff

While many nonprofits will eventually have the funding necessary to hire paid staff members, all will rely on some form of volunteers. Organizations that thrive have detailed plans for recruiting, training, encouraging, and maintaining volunteers. Volunteers who feel under-utilized or under-appreciated will either never come back or, worse, tell their friends and family about their bad experience with your nonprofit. On the other hand, volunteers who are motivated and excited about the organization will work hard and act as free marketing in the community for your cause.

8. Strategic Planning Ensures Uniformity

All nonprofits require ongoing attention and management, otherwise called governance. One vital form of governance comes in strategic planning, or working toward a set of goals and evaluating the organization’s current strengths and weaknesses. A detailed strategic plan ensures everyone involved with the nonprofit has a role in the origination’s direction, from the Board of Directors to every volunteer. Strategic plans are not one-time endeavors and should be updated every one to three years.

9. Compliance Prevents Penalties and Fees

After completing each fiscal year, nonprofit organizations must comply with year-end reporting at both the state and federal levels. Failure to remain in compliance with these requirements can result in incurring penalty fees, revocation of tax-exempt status, and even having your corporation dissolved by the state. While not as exciting as carrying out the nonprofit’s mission, annual compliance is crucial.

Though nonprofit organizations are essential to every community, starting one can be a time-consuming and often complicated process. When questions arise, don’t hesitate to contact a nonprofit consultant to ensure all necessary legal and organizational requirements for your nonprofit startup are correctly tackled.

Take your good idea to a fully-functioning 501c3

The Start a Nonprofit Class is an on-demand, self-paced course taught by nonprofit expert, Randy Hawthorne. This class walks you through the beginning steps of taking a cause concept to an operational nonprofit mission.

As with any company, there’s going to be some uncertainty about the future when starting a nonprofit. If you want to keep your organization afloat, it helps to know how many of them fail, where they fail and why. This isn’t meant to be taken as gospel—we certainly can’t tell the future. But being aware of the statistics can aid in your decision-making, so take a look at the stability and prevalence of nonprofits nationwide.

How many nonprofits fail?

First, it’s important to note how the IRS determines nonprofit failure. Each year, they send out a Form 990 that organizations must return to notify them that they’re still in business. Organizations that don’t respond for three years are automatically removed from the IRS’s list of registered organizations. So, how many of the more than 1.5 million tax-exempt organizations nationwide are successful (or at least operational) in the long-term? Well, it’s hard to say exactly, because although organizations are supposed to notify the IRS when they formally dissolve, not all of them do. Plus, some organizations may be inactive temporarily, but eventually, find funding and are able to start back up again.

One of the major reasons many nonprofits dissolve is that they fail to plan properly and prepare to succeed. Working with a professional consulting firm that specializes in nonprofit startups like BryteBridge can increase a nonprofit’s likelihood of not only surviving the filing and starting process but thriving with solid funding and program planning. 

In an IRS study of “nonfilers,” around 16 percent of nonprofits that filed their 990s from 2000 to 2005 did not re-file in 2005. This indicates they either fell under the $25,000 filing threshold or ceased operations altogether. A more recent statistic says from the middle of 2010 to the end of 2017, the IRS revoked the tax-exempt recognition of more than 760,000 nonprofit organizations for failing to file Form 990 returns.

Where are nonprofits most successful?

A 2016 study showed that Washington D.C. had the most nonprofits per capita, with one nonprofit organization for every 86 inhabitants. Vermont is next, with a nonprofit for every 160 people, which doubles the national average of 320. The state with the fewest charities per person is Utah, with one for every 546 people; Nevada, Mississippi, Arizona and South Carolina also make up the bottom five. Note, however, that this doesn’t determine the amount people donate in each state or the size of the organizations, but it does help indicate which states are charity-friendly, no matter the size.

Here’s an interactive map that will tell you how many nonprofits your state has per person. And these maps will tell you exactly how many nonprofits are in your state and how many there are per 1,000 people.

It’s also important to remember that the number of nonprofits in an area does not determine how viable starting a nonprofit would be in that area. In fact, it might be just the opposite. Areas with few nonprofits deal much less with mission creep and competition for funding.

Which types of nonprofits are most successful?

The National Center for Charitable Statistics uses the National Taxonomy of Exempt Entities to classify nonprofits as one of 26 categories that can be generalized into eight larger categories: Arts, Culture and Humanities, Education, Environment, Health, Human Services, International Affairs, Public and Societal Benefit and Religion-related. The largest group is human services with 35 percent of all nonprofits. This includes the subcategories of employment, housing, public safety, etc. The smallest type deals with International and Foreign Affairs, which makes up 2.1 percent of all nonprofits.

Keep in mind that there are successful and unsuccessful nonprofits in each of these categories, and a highly concentrated category likely means there’s more competition in that area. However, it helps to know which types of nonprofits Americans prioritize and understand which category yours falls into.

What can your organization do to stay afloat?

According to Forbes, over half of all nonprofits are destined for failure (yikes!). But don’t worry—there’s a simple solution: 77 percent of nonprofits don’t have a leadership or strategic plan in place. In other words, they’re just winging it. And more than half of those who do have written strategic plans say that they aren’t reviewed on at least a quarterly basis. So, even if organizations have a plan, they may not actually use it to make adjustments and stay on course during the year. This leads to disorganization, unmet goals and, ultimately, a failed nonprofit.

To avoid becoming just another negative statistic, make a well-thought-out, official plan for your nonprofit. Set concrete goals. Create a leadership transition process. Come up with innovative fundraising and management ideas and note them on your document. Then, check in every quarter to make sure you’re staying on track. The more organization and goal-setting you do, the more motivated your nonprofit will be to succeed.